The Hindu Business Line : Pre-qualification spadework

ONE of the most important challenges faced by the small and medium-size Indian construction companies is the stringent pre-qualification criterion. Since pre-qualification is the first step in bagging a contract, it is of paramount importance.

A construction company, in order to be eligible for bagging the contract, needs to satisfy certain prerequisites. These, along with the scope and details of the project and general conditions of the bid, are generally stated in the tender notice and the pre-qualification document issued by those seeking the services of such companies. Interested construction companies fill in the pre-qualification documents, apply and pre-qualify themselves to bid for the project.

The prerequisites cover the broad ambit of technical and financial capabilities and range from the company's track record, the size, value and the type of similar projects executed, and number of years in the business, turnover, size of the net worth, and so on.

Larger the project size, more stringent are the prerequisite norms. This is the case with government projects such as the Golden Quadrilateral and the North-South East-West Corridor, which are large in size; only companies with technical expertise and considerable financial muscle have been able to bid for these projects. Smaller companies, on the other hand, owing to their very size, would not pre-qualify for these projects even if they have the requisite technical capability.

However, several companies have also managed to cope with this challenge by entering into joint ventures (JVs) or by forming a consortium with MNCs or domestic construction companies or both, to pre-qualify themselves and bid for these projects.

For instance, Nagarjuna Construction is executing projects worth Rs 1,200 crore on JV basis. Madhucon Projects has also entered into several JVs that have pre-qualified for projects worth Rs 2,000 crore.

Even in the case of JVs, several tender notices specify the minimum tenure of association the company should have with its JV partner, if a company wants to pre-qualify itself for a project through a consortium. For instance, a minimum association period of five years has been fixed for JVs by the Guwahati Metropolitan Development Authority for the construction of an indoor stadium at Rajiv Gandhi Sports Complex.

Companies are also bolstering their balance-sheet to improve their bidding capability and build their order book. For instance, IVRCL Infrastructures is planning to raise Rs 100 crore by way of equity. The company has also entered into several JVs and has pre-qualified themselves for projects worth Rs 4,000 crore.

Trends in BOT roads

The Government's initiative to attract foreign/domestic private investments, and to promote the involvement of the private sector in the construction and maintenance of the highways has resulted in the construction of roads through the Build-Operate-Transfer (BOT) model.

That is, the construction companies will invest funds and develop these (packages) roads, operate and maintain them for a period (which can range up to 30 years), collect the toll from the users to cover costs and mark-up and, finally, transfer the roads back to the government at the end of the period. However, the toll-based BOT model for constructing roads has, to a large extent, proved unsuccessful.

Consider this. The Maharashtra State Road Development Corporation (MSRDC) spent Rs 1,630 crore (raised through bonds guaranteed by the State Government) and constructed the Mumbai-Pune express highway through this toll-based BOT model.

The company, at present, is getting revenues of about Rs 5.6 crore per month (only 40 per cent of the projected monthly revenue of Rs 14 crore) through toll collections.

MSRDC is now planning to allow Bollywood use the expressway and tunnels for shooting for a daily fee, to improve its revenue prospects.

The story has not been different for the Noida Toll Bridge developed by IL&FS and Coimbatore-bypass constructed by Larsen & Toubro.

Emerging BOT models

The Government now also offers BOT projects in two other forms — the annuity model and the subsidy model. Under the former, the company that wins the bid will get a fixed return from the Government.

For instance, the Bangalore-Maddur expressway order bagged by the Nagarjuna Construction recently is based on this model. The risk here is comparatively lower as the company will get a fixed amount of Rs 29.7 crore every six months.

The subsidy-based model, on the other hand, is a variant of the toll-based BOT model. The toll that the successful bidder can charge the users of the road is fixed before the bidding process starts (including the periodic escalation in toll).

The bidding takes place on the basis of the subsidy that the bidders seek from the Government every year to cover their costs and mark-up over a period of time. The company that bids for the lowest subsidy is awarded the contract.

In case the usage is good enough to cover costs and the mark-up, the subsidy is the icing on the cake.

This is why companies are keen on this model. Recently, the tendering process for seven BOT road projects was based on this model.

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